Some Best Practices: Crowdfunding

I have been asked on numerous occasions now from friends and acquaintances whether or not they can leverage the power of donation based crowdfunding for their ideas and if so, how to go about doing it - sounds like that is worth a blog post. Here are my thoughts.

Choosing Crowdfunding

Product
Some ideas are better suited for crowdfunding at this stage of the industry's development. The defining market tie is consumer focus. Products and projects that are relatively simple to understand and use work well - creative variations on familiar form. Physical, philanthropic and artistic projects have historically seen the most successful fundraising. Yes, technology/software has had the largest, most advertised wins, but they are not the current market norm.

Platform
Choosing a platform is a nuance of your product/idea. Kickstarter has the largest brand and more internet traffic, and is particularly selective and creative oriented. Indiegogo has a flexible process, an international scope and accepts a broad range of campaigns. Each has its advantages and disadvantages depending on your project. Other platforms are specialized around industry or product. No matter which one you choose, choose one platform and focus your efforts.

Payment
The business model for crowdfunding is still evolving. Make sure you read the terms, conditions and pricing parameters. Some platforms are all or nothing campaigns, others are progressive, where you  keep any portion of your raise. Also payment processing fees may be included in or in addition to platform transaction fees. These parameters are the difference between raising $100k and having up to $15k of it sliced off in total fees or all of your raise "returned" to donors. Finally, be sure that you are satisfied with all of the payment options available to potential campaign contributors.

Managing Crowdfunding

Networking
A successful campaign requires you to be ready to leverage your network - before you even add a project to a platform. Find a couple of friends or donors that will commit to your campaign in order to build momentum from day one. Organize and notify all of the people in your network and in your team's network to set up your campaign for success. In this sense, you can see how it is better when more than one person is involved.

Presentation
Take the time to put together an executive summary of your idea or product, but then distill it to the key points. Use this to create a concise presentation. It should highlight the uniqueness of your idea, its funding schedule, product timing, relevance to the market, the expertise of your team, and passion. A video is a necessary media touch. It is the quickest way to inform, educate and connect with potential donors. I recommend making it about 2-3 minutes. Use it to amplify and personalize the project.

Rewards
The most successful crowdfunding campaigns are donation based right now, but most offer something in return. If you choose one of these platforms, put time and effort into determining attractive rewards for potential donors. Do this before you launch your campaign. Think about your budget in terms of time and money. How much time will it cost you to organize and create these rewards and how much money will they cost? Be creative from a consumer perspective, what would you want?

Social Media
Crowdfunding works well as a social media funnel. You need to actively use it to draw attention to your campaign and keep it in front of potential contributors. Build and use connections to bloggers and journalists to help boost your signal. Entice them with stories on big wins for your campaign or project, and be sure to give your followers on Facebook, LinkedIn and Twitter updates on progress.

Choosing and managing a crowdfunding campaign takes a fair amount of work - as it should. Asking for external funding is a serious undertaking. Take the time and the effort to make sure that your product is right for the market and that you make right moves. Good luck.

Startup Standouts: CircleUp

CIRCLEUP

CircleUp is an equity based crowdfunding platform which connects individual and small institutional investors to private consumer product/retail companies with existing products that have national scope or potential. 

Location: San Francisco, CA
Website: https://circleup.com/
Size: < 10 people
Funding: $1.5M seed
Founders: Ryan Caldbeck (CEO) / Rory Eakin (COO)

Why it stands out:
- The highly industry-relevant backgrounds and complementary skills of the co-founders, plus team

- Smart, strategic direction focused on consumer products, accredited investors and revenue generating entities

- Quality of platform: screening by professional investors, revenue minimums, 2% acceptance rate

- Significant partnerships that extend its reach (e.g. SoMoLend [debt], General Mills [exits])

- Clayton Christensen, the voice of disruptive innovation himself, is notable as an early investor

Startup Standouts: Wallaby Financial

WALLABY FINANCIAL

The Wallaby Card lets you carry just one piece of plastic, through which it can maximize the cash back rebates, merchant discounts, frequent traveler rewards, etc on all your credit cards (based on your preferences) every time you swipe. It is as the company says - one card to rule them all.

Location: Pasadena, CA
Website: http://www.walla.by/
Size: < 10 people
Funding: $1.1M seed
Founders: Matthew Goldman (CEO) / Todd Zino (CTO)

Why it stands out:
- Steps towards consumers with a practical use case without significantly changing their current behavior
- Adds next level value by minimizing consumer data overload and simplifying financial decision making
- Great positioning to collect real time, transaction based spending data
- Founders Fund is notable as a seed stage investor

Startup Standouts: SmallKnot

SMALLKNOT

"Smallknot lets you invest in the small businesses in your community in exchange for goods, services, special perks and benefits."

Location: New York City
Website: http://smallknot.com/
Size: < 10 people
Funding: $118k incubation
Founders: Jay Lee (CEO) / Ben Rossen (COO) / Jason Punzalan (CTO)

Why it stands out:
- Fills a very specific and necessary crowdfunding niche by focusing on small businesses
- Really leverages the crowd by taking a geographically local approach to the crowdfunding model
- Beautifully designed product with a fluid user experience
- The quality (and coolness) of the small businesses actually using the platform
- Founding team dominated by lawyers, which should be very useful given crowdfunding's legally gray area
- Had the screening and future benefit of Tech Stars NYC incubation

A New Series on Startups

In a quest to find the next phase of my career that will merge passion with ambition, I have been doing research on a number of startups - mostly in the crowdfunding space but also more broadly in Fintech. Here and there on simmserely so far however, I have written of broader thoughts on the intersection of finance and technology. Today I thought I would add a series that takes a specific look at some of the more interesting startups that I have come across along the way - because why not? I am calling this new series: Startup Standouts. First one after the post, but stay tuned for more.

Venture to Crowdfunding: "You Can't Disrupt This."

With a quick Google search using the right keywords, there are numerous articles describing crowdfunding (CF) as disruptive to venture capital (VC) or at least potentially so. Many take for granted the reader's knowledge of the term and its logic, but it is a lot harder to put together than it may seem. Here is a look at the very specific definition of the word, along with a few supporting arguments that might lead one to draw that conclusion.

Let us start out by clarifying what disruption is not. Disruption of an industry does not cover change (even if it is radically different from the status quo) which improves upon the existing industry product. This is a sustaining development (examples*). Disruption, in the Clayton Christensen sense of the word, defines a change that brings with it (in the form of a product or a new market) a very different value proposition than had existed or mattered previously (examples**). It trades off performance for either convenience, accessibility, affordability, simplicity or some combination thereof and its key often lies in the use case as opposed to an advancement in technology.

Examining the case for crowdfunding using the characteristics of Christensen's definition as a guide:

The value proposition of disruptive innovation is materially different, yet its performance trajectory exceeds market needs.
The main value proposition of venture capital is "smart money", i.e. connections and advice through a filtered loop. Its performance is measured by return and rolodex. Crowdfunding instead is "cool money". Its main value proposition is broad access through social media. It is ranked foremost on other dimensions - the type of entrepreneurs on the platform and their success in raising funding. It would perform poorly on a traditional scorecard based on established market needs, but there is a window. At the lower end of the funding curve (seed stage) venture capital overshoots the market. It provides more at a higher cost than is needed to build a minimum viable product (MVP). Arguably, crowdfunding appears to be on the way to figuring out its shortcomings at that very end of the spectrum. With market needs stable and MVP cost still falling, all that is required are a couple of sustaining technologies to cover the gap. Add a few more over time and crowdfunding could start its ascent upmarket to traditional VC territory. That sounds pretty disruptive.

Disruptive innovations are typically simpler, cheaper, more reliable, and convenient than established technologies.
Crowdfunding is nothing if not incredibly convenient. It allows entrepreneurs to leverage and manage their fundraising efforts through one channel point, turning the venture model on its head. It is cheaper as well. The flat fee or percentage of round being charged by most reward or donation based platforms are significantly cheaper than venture equity stakes and maintenance fees. Crowdfunding has not simplified the process of raising funding however - the basic preparations are still required (plan + pitch + perform + pass). Instead it has simplified access to capital for the average entrepreneur who may not know the intricacies and intimacies of silicon valley. Despite these, crowdfunding is not nearly as reliable. There are still major trust and fraud concerns, important themes regarding brand and quality. Moreover, venture has less capital volatility because of its funding structure. Placing more weight on cost (because of its implications) than the other characteristics, CF still looks pretty disruptive though.

Disruptive innovations are typically not rational or feasible investments for incumbents.
It has already been noted that current revenue streams associated with crowdfunding are not as lucrative as those of venture capital. There are no performance fees based on equity returns (which typically produce the bulk of VC profits) and neither are there any maintenance charges. The business models are fundamentally different. Crowdfunding is transaction based instead of equity based. Transaction based models are powered by volume, and with few exceptions are tied to lower profit margins, which favor low cost operations. These characteristics are uniformly unattractive to or typically unattainable by incumbents. Venture capital is no different. The implication is that the disruptive market will likely not look attractive enough until it is too late. Again, CF looks well placed to be disruptive.

Articles calling crowdfunding disruptive based on similar analysis seem right to draw such conclusions, so perhaps crowdfunding's response to venture's "You can't disrupt this" should be "You're wrong. It's hammer time."

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*Sustaining examples: HD over digital, Blu-Ray's attempt on DVD, DVR over TiVo, Google's search algorithm over Yahoo's, carbon fiber bike frames over aluminium, ipad over the iphone, voicemail over answering machines, CD/DVD over tapes.
**Disruptive examples: digital over chemical photography, Google AdWords over direct advertising, the iphone over laptops, fast food disrupted restaurants, netflix disrupted blockbuster, skype is disrupting telephony, nintendo wii is disrupting xbox/playstation, online brokerages disrupted full service.

Finance is Dead, Long Live Finance

There is a change happening in finance. Lines are being drawn. The regulatory and public acceptance ones have been clear, but here is another. There are a growing number of startups using technology to cross the line into traditional finance territory, populating an emerging area called FinTech.  Most of these firms are setting up in niches - the equivalent of a bowling pin strategy. Get the first pin right, and it increases the likelihood of clearing everything else out, including the incumbents. All the elements are here for disruption and arguably that disruption is happening right now.

Finance has for the last twenty years built up a war chest of talent. It has been incredibly selective, sometimes suffocatingly so, about screening applicants, perfecting the art of enticing bright young students with the promise of money and prestige. In recent years however, there has been a mass exile and exodus of that talent, who, unlike new graduates, are wiser for the knowing. No matter where you look in the wave of industry unemployment you will find a significant number of highly educated, battle tested survivors - with the capacity and motivation to challenge the status quo.

Finance has also long been protected by formidable regulation, but in the past few years, this barrier to entry has been weakened on the back of public dissent and pioneers. Waves of negative publicity over wall street compensation turned from perennial ground powder into the primer for a powerful first strike. Organized public outrage followed, culminating in the swift movement and strength of Occupy Wall Street. Then, helped by the focused interests of forward business thinkers, change went straight for the law books and with bi-partisan congressional action enacted the passage of the JOBS act. This progress has not come without casualties  of course, but it has resulted in an unprecedented encroachment into traditional finance territory.

Both of these elements trace their roots in part to the financial crisis, which is just the point. It has demanded an enormous amount of time and resources from incumbents. The volatility of that breaking point has fallen off its peak, but psychologically the industry is still very preoccupied, and aftershocks like the LIBOR scandal make solid footing a struggle. Meanwhile, waves of financial innovation ripple outward and lap at its heels. FinTech startups are using the power of technology to compress business models, embrace mobile, leverage the crowd, simplify investing, refocus on consumers, integrate social, streamline payments, and tackle a stream of long static issues in the industry. It is still very early, but these startups are slowly prying the door open to a new era in finance.